Use caution when considering reverse mortgages
As seniors and their families struggle to deal with the cost of long-term care, reverse mortgages have become a continuing topic. While seen by some as a convenient source of ready cash, this strategy can come with pitfalls that must be recognized in advance.
The most consistent problems I see relate to using reverse mortgage payouts to fund long-term care outside the home, either in nursing homes or in assisted living. Because of default provisions written into the typical reverse mortgage, this tool is generally not the best idea to fund nursing home care.
A more appropriate use is to assist older people who are staying in their homes indefinitely and then only as a measure after others have been considered.
Also, adult children who are serving as power of attorney need to be informed so that they can act responsibly. This is what you need to know.
What a reverse mortgage is. When a consumer who is at least 62 years old owns his or her residence and needs additional cash, either in a lump sum, monthly payments or a credit line, one option could be to take out a reverse mortgage.
The homeowner receives cash from a lender, usually a bank, and, in exchange, gives the lender an interest in his property. He still owns his property and can live there. He does not need to make regular loan payments but he is tapping into the equity on his house.
If there is already a mortgage against the property, it must be satisfied to complete the transaction. Satisfying an existing mortgage with a reverse mortgage is expensive and should be avoided. Closing costs are higher than with traditional mortgages and there are continuing fees.
Still, reverse mortgages have an attraction for people who are “house rich and cash poor.”
The maximum amount that the lender will provide is based on factors including the age of the borrower, value of the house, amount of equity in the house and current interest rates.
The older the borrower, the more that can be borrowed against the property since the lender may recover on its loan when the borrower dies. Death is one event when payment is required. For purposes of long-term care, there are other considerations. If you want to know more about this process and the special court involved in the process, we recommend Inheritance Advanced
How powers of attorney are affected. Agents under power of attorney are typically given power to deal in real estate transactions. When faced with nursing home bills that could be in the $9,000 to $10,000 per month range, it would not be surprising to find adult children searching feverishly for money to pay their parents’ care costs.
Reverse mortgages are seen as one source. If this is coupled with a difficult real estate market where there are concerns whether the house might sell, a power of attorney might figure that the easiest way to proceed is to get a reverse mortgage to pay the nursing home costs.
What the power of attorney needs to know is that, when the person who takes out the reverse mortgage is out of the home for 12 months or more, the loan is in default and the lender can call the loan. If both parents live in the house and both are named on the loan, then the fact that one of them is in a nursing home for over a year will not place the loan in default but there may be other problems.
If a reverse mortgage is used to pay a husband’s nursing home costs, for instance, the equity that is left in the house will be reduced for the wife still living at home. She may need this at a later date.
The other factor to consider is other alternatives that may be available. Medicaid for nursing home care and Aid and Attendance, a veterans’ benefit for wartime veterans in assisted living, are the most common. Under either of these programs, the home would be exempted during the lifetime of the person applying for benefits although Medicaid has an estate recovery program to recover after death. An applicant can receive benefits while still owning a home.
Beyond this, if the person who needs help paying for care in a nursing home is married, the government has rules to protect assets, including the house, during their spouse’s life also. If the spouse who is in a nursing home and covered by Medicaid dies before the spouse at home, there is no claim against the house.
What is important is to make an informed decision after weighing all the possibilities. Obtain professional assistance if you are unsure of results.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.